There is tangible evidence that rents are rising across CBD office markets

2011-07-13T05:00:00Z

Perth has become the tightest CBD office market in Australia and is recording the strongest growth in rents

AUSTRALIA, 13 JULY 2011 – Statistics released by Jones Lang LaSalle Research show that below equilibrium vacancy rates in a number of office markets and a moderate development pipeline combined to cause upward pressure on prime gross effective rents in the June quarter of 2011.

Jones Lang LaSalle’s National Head of Office Leasing, Kevin George said “The CBD office markets have very low levels of spare capacity for this stage of the recovery cycle. Recent leasing transactions have crystallised our view on rents, with strong growth recorded in a number of markets in Q2.”

The Perth CBD, which became Australia’s tightest CBD office market in Q1, saw a further reduction in vacancy from 5.6% in Q1 2011 to 5.4% in Q2.

Mr George said “The large resource companies continue to be very active. Investment spending in the sector remains at very high levels and businesses are moving quickly to secure space to accommodate their expected increase in head count.”

Prime gross effective rents in Perth increased by 3.9% in Q2 and have risen by 11.2% since the trough in the rental cycle was recorded in Q3 2010.

“The next 12 months will see further rent escalations in Perth. There is a perception that the completion of City Square North and Bank West Tower in 2012 will release significant amounts of backfill space. I expect that a large proportion of the backfill space will be pre-leased prior to availability,” said Mr George.

In Brisbane it was a similar story. In Q2, the BHP Billiton Mitsubishi Alliance leased 6,000 sqm at 12 Creek Street and Rio Tinto leased another 1,600 sqm at 33-35 Herschel Street.

The strong take-up in Brisbane resulted in net absorption of 11,000 sqm and a reduction in the vacancy rate to 6.8% in Q2 from 7.9% in Q1 2011.

Mr George said, “Tenants are becoming increasingly aware that the window of opportunity to negotiate a favourable leasing outcome in Brisbane is closing. The sentiment in Brisbane will continue to improve when a number of pre-commitments, which are at an advanced stage of negotiation, are concluded for One One One Eagle Street.”

Jones Lang LaSalle’s Director of National Office Market Research, Andrew Ballantyne said, “The resurfacing of the European sovereign debt issues in Q2 had an impact on business confidence, especially in the Finance & Insurance sector.”

Across CBD office markets, positive net absorption of 24,800 sqm was recorded in Q2. Whilst the quarterly net absorption was well down on recent quarters, net absorption in the 2010-11 financial year was 279,700 sqm. As a result of increased backfill space availability, the national CBD office market vacancy rate increased slightly to 7.6% in Q2 2011 from 7.4% in Q1.

Sydney recorded the strongest net absorption in Q2 (28,900 sqm). In the 2010-11 financial year, the Sydney CBD recorded 99,800 sqm of net absorption, or 37% of the national total.

Mr Ballantyne “Despite the strong net absorption result, vacancy increased to 8.0% in the Sydney CBD in Q2. The primary reason was the quantum of backfill space left by CBA after their consolidation of multiple tenancies to the new development at Darling Quarter,” said Mr Ballantyne.

“We have yet to see a real recovery in the Finance & Insurance sector. Trading volumes through equity markets remain low, there has been limited M&A activity, while equity market volatility is not a conducive environment for the launch of IPOs,” said Mr Ballantyne.

Nevertheless, the emergency levels of incentives in the Sydney CBD that emerged during 2008 and 2009, especially for premium-grade stock, are starting to be wound back. Prime gross effective rents increased by 1.4% in Q2 and 5.5% over the past 12 months.

In Q2, the Melbourne CBD recorded -11,600 sqm of net absorption and a rise in vacancy to 6.0%. The negative result in the Melbourne CBD was largely attributed to the relocation of the Spotless Group from 350 Queen Street to St Kilda Road.

Mr Ballantyne said “Rents continue to trend up in Melbourne, increasing by 1.0% in Q2. From the trough of the rental cycle (Q2 2009), prime gross effective rents are up by almost 12%. The lack of prime contiguous space is focusing attention on the development market. A number of pre-commitment requirements are expected to be announced to the market over the next 6 to 12 months.”

In Adelaide, vacancy increased marginally to 7.0% in Q2. However, the vacancy rate remains below the long-term average and has resulted in prime gross effective rents rising by 2.5% in the quarter and 9.4% over the past 12 months.

In Q2, rents in Canberra were unchanged despite the rise in vacancy to 13.0% - a record high for the Canberra office market.

Mr George said “Australian office markets have very low levels of spare capacity for this stage of the recovery compared to the vacancy peaks of previous market downturns. The legacy of the GFC will be limited completions in 2012 and 2013.”

From the second half of 2011 to 2013, there is only 825,400 sqm of space under construction, equating to 5.2% of total stock. Over 70% of the space is pre-committed.

“The Australian economy is expected to regain momentum in the second half of 2011 and into 2012, driving corporate profitability and leading to businesses executing their hiring plans. This will create a fertile environment for above trend rental growth in the CBD office markets,” concluded Mr George.